Defined Contribution pension schemes

Providing an income in retirement
With a Defined Contribution (DC) pension you build up a pot of money that you can then use to provide an income in retirement.

With a Defined Contribution (DC) pension, you build up a pot of money that you can then use to provide an income in retirement. Unlike Defined Benefit schemes, which promise a specific income, the income you might get from a DC scheme depends on factors including the amount you pay in, the fund’s investment performance and the choices you make at retirement.

With a Defined Contribution (DC) pension you build up a pot of money that you can then use to provide an income in retirement.

What is a Defined Contribution pension?

DC pensions build up a pension pot using your contributions and your employer’s contributions (if applicable) plus investment returns and tax relief. If you’re a member of the scheme through your workplace, then your employer usually deducts your contributions from your salary before it is taxed. If you’ve set the scheme up for yourself, you arrange the contributions yourself.

While you are working

The fund is usually invested in stocks and shares, along with other investments, with the aim of growing it over the years before you retire. You can usually choose from a range of funds to invest in. Remember though that the value of investments can go up or down.

When you retire

You can access and use your pension pot in any way you wish from age 55.

You can:

  • Take your whole pension pot as a lump sum in one go. 25% will be tax-free and the rest will be subject to Income Tax and taxed in the usual way. Bear in mind that a large lump sum could tip you into a higher tax bracket for the year.
  • Take lump sums as and when you need them. A quarter of each lump sum will be tax-free and the rest will be subject to Income Tax and taxed in the usual way. Bear in mind that a large lump sum could tip you into a higher tax bracket for the year.
  • Take a quarter of your pension pot (or of the amount you allocate for drawdown) as a tax-free lump sum, then use the rest to provide a regular taxable income.
  • Take a quarter of your pot as a taxfree lump sum and then convert some or all of the rest into a taxable retirement income (known as an ‘annuity’).

The size of your pension pot and amount of income you get when you retire will depend on:

  • How much you pay into your pot
  • How long you save for
  • How much your employer pays in (if a workplace pension)
  • How well your investments have performed
  • What charges have been taken out of your pot by your pension provider
  • How much you take as a cash lump sum
  • The choices you make when you retire
  • Annuity rates at the time you retire – if you choose the annuity route

When you retire, your pension provider will usually offer you a retirement income (an annuity) based on your pot size, but you don’t have to take this and it isn’t your only option.

What you need to think about

If your work gives you access to a pension that your employer will pay into, staying out is like turning down the offer of a pay rise. The amount your employer puts in can depend on how much you’re willing to save, and may increase as you get older.

Is it time to review your retirement plans?

These reforms present people with an exciting opportunity to take control of their pensions like never before, but the reforms highlight the need to obtain professional financial advice to consider your overall position. Although it may seem counter-intuitive, accessing your pension fund in many cases may be the last asset you call on, given the tax-efficiencies. To review your situation, please call us or use the contact form by clicking here – we look forward to hearing from you.

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